Employer’s typically benefit from restrictive covenants by gaining a degree of control and predictability post termination. However, circumstances do not always provide time or resources for an employer to properly include restrictive covenants at the start of an employment relationship. This article discusses this issue further and, specifically, the options for an employer who is considering introducing new restrictive covenants into an existing employment relationship.

Existing Restrictive Covenants

Circumstances do not always afford employers the opportunity to tailor restrictive covenants for each employee. Issues typically arise where an employee has been hired on short notice or where an employee has been promoted from one role to another of more importance.

The classic example is an employee who started at entry level and has progressed to more senior positions over time. Rather than redrafting this employee’s contract every time that she or he is promoted, the original contract is simply amended to reflect title/salary changes. The employee is now a crucial senior member of the team and during an HR audit it’s identified that she or he has a one month notice period that survived from the original contract. This is certainly not the ideal position for an employer, but hopefully the issue is identified early enough and, if so, there are options.

New Restrictive Covenants

An employer cannot unilaterally impose new restrictive covenants without an employee’s agreement. What this means in practice is that those employers will have to ask the employee to agree to the new terms.  In order to ensure that there is no argument as to whether these new terms will be binding, it is usually sensible to offer as part of this request some additional consideration (typically a financial incentive of some kind).

Employers can also strategically align the introduction of new restrictive covenants with bonus or share awards to mitigate the financial impact of incentivising an employee’s acceptance. Senior employees should usually expect to be bound by relatively significant restrictive covenants so there is normally little resistance to reasonable revisions.

Employee Refusal

Unfortunately, not all employees agree to the introduction or amendment of restrictive covenants. The employer’s options in these circumstances are limited. An employer can invite the employee to agree to the new terms but, if they choose not to agree, the only step the employer can take to impose the terms is to terminate that employee and offer them a position on the new terms.

Legally, this causes a number of issues. First, there is the risk that such a termination could be considered “unfair” under the Employment Act 2000. Depending on the employee’s tenure, the employer could be liable to a significant award from the Employment Tribunal.

Second, there is the risk that an employee could bring a claim for wrongful dismissal in the Supreme Court.

There are ways to mitigate these risks (or at least the financial ramifications). For example:

Paying an employee in lieu of notice. This mitigates any award for wrongful dismissal.

Offering an ex gratia payment (which is calculated to mirror severance entitlement under the Employment Act 2000).

Improving other elements of an employee’s overall terms to offset the negative impact of the new restrictive covenants.

The best way to mitigate the risks outlined above is to seek legal advice  before amending contracts with senior executives and ensuring the terms are tailored to meet the employer’s needs. Each case will be based on its own unique facts and we caution against the casual use of precedents and templates.

This note is intended as a high level overview of this topic. Legal advice should always be sought on a case by case basis.

Type

Insight

Locations

Bermuda

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